Income inequality: how has it changed, why and should ... · • Several reasons why government should aim to affect inequality • Different reasons imply different policy responses

Agnes Norris Keiller

[email protected]

Income inequality: how has it changed, why and should governments care?

Income inequality on the up

© Institute for Fiscal Studies Income inequality: how has it changed, why and should governments care?

20

22

24

26

28

30

32

34

36

38

40

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

Gin

icoe

ffic

ient

UK US Canada Germany Japan Norway Sweden

Note: Income is measured as total household income net of taxes and benefits and is adjusted for household size. Source: US from OECD all other countries from https://www.chartbookofeconomicinequality.com/


There should exist among the citizens neither extreme poverty nor again excessive wealth, for both are productive of great evil

1998: We are intensely relaxed about people getting filthy rich as long as they pay their taxes.

Plato 360 BCE

Peter Mandelson

A society that puts equality before freedom will get neither

Milton Friedman 1980

I would like to be remembered as a person who is concerned about freedom and equality and justice and prosperity for all people

Rosa Parks1960s

2012: I don't think I would say that now...we've seen that globalisation has not generated the rising incomes for all

Today


Should governments care about economic inequality?

If so, what policies are most appropriate?

• Several reasons why government should aim to affect inequality

• Different reasons imply different policy responses

Inequality and poverty: facts and causes

• Ineq. up in many countries, US and UK saw very large surges in 80s

• Global ineq. also up due to fast growth at the top of the world income dist.

• Different possible causes of ineq. rise have different policy implications

Inequality: cause for concern?


First Welfare Theorem


A private market equilibrium will be Pareto efficient if:

1. No externalities

2. Perfect competition (individuals and firms are price takers)

3. Perfect information

4. Agents are rational

If any of 1-4 don’t hold then gov. intervention can be efficient

Even without market failures, ineq. generated by the market outcome may warrant gov. intervention

• e.g. philosophical concerns about ‘fairness’

Inequality as an externality


Externalities:• Benefits/costs that arise from behaviour of an agent and affect other agents

People unlikely to consider how their choices affect inequality• This oversight = externalities if ineq. affects others

Several reasons why inequality is an externality1. Preferences for equality (ineq. a negative externality)

2. Inequality incentivises effort (ineq. a positive externality)

1. implies intervention to ↓ inequality can ↑ social welfare

• Possible interventions include market intervention (e.g. maximum earnings limits) and redistribution (e.g. income tax and means-tested benefits)

2. implies intervention likely to involve equity-efficiency trade-off

Inequality and market competition


Uncompetitive markets can increase inequality

• Monopsonies suppressing wages for some types of workers

• Monopoly owners enjoying super-normal profits

Ineq. cause for concern as a symptom of underlying problem

Market intervention to tackle underlying problem better than redistribution

• Minimum wages to increase employee bargaining power

• Competition policy to try and prevent monopolies

Policies that ↓ ineq may not face equity-efficiency trade-off

Inequality and imperfect information


Imperfect info. means some risks cannot be insured privately

• e.g. job loss, negative health shocks

These risks can cause ‘lower-end’ inequality (a.k.a. poverty)

Government-provided ‘social safety net’ stands in for missing market

• Creates more equal income distribution

• Financing safety net likely to face equity-efficiency trade-off

Inequality: cause for concern?


Failures of the FWT justify policies that mitigate inequality

Externalities1. Preferences for equality = too much ineq. in market outcome

Imperfect competition2. Inequality due to uncompetitive markets

Imperfect information3. (Lower-end) inequality due to uninsurable risk

Appropriate policy responses differ between reasons 1-3

Positive externalities due to inequality create a trade-off

• Some (not all) policies to ↓ ineq. may also ↓ size of economy

Inequality and poverty: stylised facts


Measuring inequality


Different measures have different benefits:

• The Gini coefficient incorporates the entire income distribution

• Percentile ratios (e.g. 90:10) are insensitive to extremes

• Income shares (e.g. top 1% share) can be calculated over many decades (à la Piketty, Saez, Zucman 2018)

Different outcomes interesting for different reasons:

• Consumption: proxies ‘lifetime income’

• Annual income: important determinant of material living standards

• Wealth: important for transmission of inequality across generations



Income inequality in UK much higher than in 1960s due to large rise in the 1980s

Income inequality in the UK


0.22

0.24

0.26

0.28

0.30

0.32

0.34

0.36

0.38

0.4019

60

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

Gin

icoe

ffic

ient

Note: Income is measured as total household income net of taxes and benefits and is adjusted for household size. Source: Cribb et al. (2018)



Income inequality in UK much higher than in 1960s due to large rise in the 1980s

• Increases also seen in other OECD countries but sharpest in US and UK

• Whole income distribution widened in the 80s

• More recent changes driven by top of the income distribution

Income inequality in the UK


2.5

3.5

4.5

5.5

6.5

7.5

8.5

2.50

3.00

3.50

4.00

4.50

5.0019

60

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

Top

1% s

hare

90:1

0 ra

tio

Note: Income is measured as total household income net of taxes and benefits and is adjusted for household size. Source: Cribb et al (2018)

Top 1% share

90:10 ratio



Income inequality in UK much higher than in 1960s due to large in the 1980s




Pulling away of top 1% observed in most countries

Global inequality up due to top of global income distribution

The ‘elephant curve’


Note: income refers to total pre-tax incomeSource: Alvaredo et al. 2018



Income inequality in UK much higher than in 1960s due to large in the 1980s




Pulling away of top 1% observed in most countries

Global inequality up due to top of global income distribution

Income growth among poor has reduced absolute poverty

• UK absolute poverty: 29% in 2000−01 19% in 2016−17

• Global absolute poverty: 29% in 1999 10% in 2015

The global income distribution


The global income distribution


Inequality: causes and policy implications


Inequality: what’s caused the increase?


Empirical work points to several causes of upward trend

• Skill/task-biased technological change (Goldin and Katz, 2009/Autor, Levy Murnane, 2003)



Empirical work points to several causes of upward trend

• Skill/task-biased technological change (Goldin and Katz, 2009/Autor, Levy Murnane, 2003)

• Trade (David Autor’s Freakonomics podcast)

Both have increased productive potential of the economy

Market intervention/redistribution faces equality-efficiency trade off



Several different hypotheses on why top 1% has pulled away

1. Returns to capital > economic growth rate (Piketty, 2014)


Several different hypotheses on why top 1% has pulled away

1. Returns to capital > economic growth rate (Piketty, 2014)

2. ‘Super-star’ effects (Kaplan and Rauh, 2013)

3. Rise in market power (De Loecker and Eeckhout, 2017)

… with different policy implications

1. Emphasises asset taxation (implementation difficult)

2. Gov. intervention/redistribution faces equality-efficiency trade off

3. Competition policy could increase efficiency and equity

Research on the causes of the top 1% rise will have important policy implications


Inequality: where are we heading?


Some interesting resources


How “economic despair” affects high school graduation rates for America’s poorest students (2 mins) https://youtu.be/wIHjPRho4A4

David Autor – Did China eat America’s jobs? (40 mins) http://freakonomics.com/podcast/china-eat-americas-jobs/

Ezra Klein and Matt Yglesias discuss US inequality and the rise in market power (50 mins) https://www.vox.com/podcasts/2017/8/24/16189890/weeds-us-economy-inequality-trump

Global data sources:

• Gapminder (world income distributions) https://www.gapminder.org/

• World Inequality Database (income shares, 90:10 ratios) https://wid.world/

• Chartbook of Economic Inequality (disposable income) https://www.chartbookofeconomicinequality.com/

https://youtu.be/wIHjPRho4A4

http://freakonomics.com/podcast/china-eat-americas-jobs/

https://www.vox.com/podcasts/2017/8/24/16189890/weeds-us-economy-inequality-trump

https://www.gapminder.org/

https://wid.world/

https://www.chartbookofeconomicinequality.com/

References


Alvaredo F, Chancel L, Piketty T, Saez E, Zucman G, eds. 2018. World Inequality Report 2018. Cambridge, Massachusetts London: The Belknap Press of Harvard University Press

Autor DH, Levy F, Murnane RJ. 2003. The Skill Content of Recent Technological Change: An Empirical Exploration. The Quarterly Journal of Economics. 118(4):1279–1333

Cribb J, Waters, Tom, Norris Keiller, Agnes. 2018. Living Standards, Poverty and Inequality in the UK: 2018. London: The Institute for Fiscal Studies

De Loecker J, Eeckhout J. 2017. The Rise of Market Power and the Macroeconomic Implications. w23687, National Bureau of Economic Research, Cambridge, MA

Goldin CD, Katz LF. 2009. The Race between Education and Technology. Cambridge, Massachusetts London, England: The Belknap Press of Harvard University Press. 1st Harvard University Press paperback edition ed.

Kaplan SN, Rauh J. 2013. It’s the Market: The Broad-Based Rise in the Return to Top Talent. Journal of Economic Perspectives. 27(3):35–56

Kearney MS, Levine P. 2016. Income Inequality, Social Mobility, and the Decision to Drop Out of High School. Brookings Papers on Economic Activity. 47(1):333–96

Lakner C, Milanovic B. 2016. Global Income Distribution: From the Fall of the Berlin Wall to the Great Recession. The World Bank Economic Review. 30(2):203–32

Piketty T, Goldhammer A. 2014. Capital in the Twenty-First Century. Cambridge, Mass.: Belknap Press of Harvard Univ. Press

Piketty T, Saez E, Zucman G. 2018. Distributional National Accounts: Methods and Estimates for the United States. The Quarterly Journal of Economics. 133(2):553–609

Documents

Income inequality: how has it changed, why and should ... · • Several reasons why government should aim to affect inequality • Different reasons imply different policy responses